Money was then invented over a long period of time. Eventually money came to fulfil the following three functions during inflation and deflation:
a. Unstable medium of exchange
b. Unstable store of value
c. Unstable unit of account
Non-monetary items which are all items which are not monetary items were only defined in monetary terms after the invention of money. The economy came to be divided in the monetary economy and the non-monetary or real economy. There were only unstable monetary items and variable real value non-monetary items. There were no constant real value non-monetary items yet. The non-monetary or real economy consisted of only variable real value non-monetary items. Non-monetary items are all items that are not monetary items.
Monetary items are money held and items with an underlying monetary nature.
Examples of monetary items in today’s economy are bank notes and coins, bank loans, bank savings, other monetary savings, other monetary loans, bank account balances, treasury bills, commercial bonds, government bonds, mortgage bonds, student loans, car loans, consumer loans, credit card loans, notes payable, notes receivable, etc.
Unstable money and other unstable monetary items´ real values are continuously being eroded by inflation over time. Inflation only erodes the real value of unstable money and other unstable monetary items. Inflation has no effect on the real value of non-monetary items.
Non-monetary items are all items that are not monetary items.
Non-monetary items in today’s economy are divided into two sub-groups:
a) Variable real value non-monetary items
b) Constant real value non-monetary items
There were still no units of constant purchasing power because there was still no CPI at that time. There was still no HCA model, no very destructive stable measuring unit assumption based on a fallacy and no financial capital maintenance in nominal monetary units fallacy during inflation and deflation. There was still no price-level accounting, no constant purchasing power (CPPA) inflation accounting model for hyperinflationary economies and no real value maintaining continuous financial capital maintenance in units of constant purchasing power basic accounting model (CIPPA) for low inflationary and deflationary economies. There were still no financial reports.
Copyright (c) 2005-2010 Nicolaas Smith. All rights reserved. No reproduction without permission.
Fin24 17-3-11
Monday, 27 December 2010
Friday, 17 December 2010
Variable Items
Variable items are non-monetary items with variable real values over time.
Examples of variable items in today’s economy are property, plant, equipment, inventories, quoted and unquoted shares, raw material stock, finished goods stock, patents, trademarks, foreign exchange, etc.
The first economic items were variable real value items. Their values were not yet expressed in terms of money because money was not yet invented at that time. There was no inflation because there was no money. Inflation is always and everywhere a monetary phenomenon. Inflation has no effect on the real value of non-monetary items. There was no unstable monetary medium of exchange. There was no unstable monetary unit of account. There was no unstable monetary store of value.
There was no double entry accounting model at that time. There were no historical cost items. There was no very destructive stable measuring unit assumption approved by the International Accounting Standards Board whereby accountants assume the unit of measure is stable, i.e., they consider that changes in the general purchasing power of money are not sufficiently important to require financial capital maintenance in units of constant purchasing power during low inflation and deflation. The stable measuring unit assumption is based on a very popular accounting fallacy since the real value of money is never absolutely stable on a sustainable basis during inflation and deflation. There was no Historical Cost Accounting model and no financial capital maintenance in nominal monetary units per se (another very popular IFRS-authorized accounting fallacy) during inflation; that is to say: there were no Historical Cost accounting fallacies. There was no value based accounting. There was also no Consumer Price Index at that time. Consequently there were no units of constant purchasing power and no price-level accounting.
There was no International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies supplying us with the current definition of inflation accounting. There was thus no Constant Purchasing Power Accounting (CPPA) IFRS-approved inflation accounting model under which all non-monetary items (variable and constant real value non-monetary items) in Historical Cost and Current Cost financial statements were required to be restated by means of the period-end CPI to make these restated HC and CC financial statements more useful during hyperinflation.
There was also no real value maintaining financial capital maintenance in units of constant purchasing power accounting model – Constant ITEM Purchasing Power Accounting (CIPPA) – as an official IFRS-approved alternative basic accounting model to the traditional HCA model during low inflation and deflation. There was no IFRS compliant basic accounting option where under only constant items are continuously measured in units of constant purchasing power during low inflation and deflation. There was no option of continuously measuring only constant items in units of constant purchasing power by applying the monthly change in the CPI during low inflation and deflation in order to implement a constant purchasing power financial capital concept of invested purchasing power by continuously measuring financial capital maintenance in units of constant purchasing power and continuously determining profit/loss in units of constant purchasing power.
There were no financial reports: e.g. no income statements, no balance sheets, no cash flow statements, no statements of changes in shareholders´ equity, etc. There were no monetary items and no constant items. There were only variable real value items not yet expressed in monetary terms.
Copyright (c) Nicolaas J Smith 2005-2011. All rights reserved. No reproduction without permission.
Fin24 16-3-11
Examples of variable items in today’s economy are property, plant, equipment, inventories, quoted and unquoted shares, raw material stock, finished goods stock, patents, trademarks, foreign exchange, etc.
The first economic items were variable real value items. Their values were not yet expressed in terms of money because money was not yet invented at that time. There was no inflation because there was no money. Inflation is always and everywhere a monetary phenomenon. Inflation has no effect on the real value of non-monetary items. There was no unstable monetary medium of exchange. There was no unstable monetary unit of account. There was no unstable monetary store of value.
There was no double entry accounting model at that time. There were no historical cost items. There was no very destructive stable measuring unit assumption approved by the International Accounting Standards Board whereby accountants assume the unit of measure is stable, i.e., they consider that changes in the general purchasing power of money are not sufficiently important to require financial capital maintenance in units of constant purchasing power during low inflation and deflation. The stable measuring unit assumption is based on a very popular accounting fallacy since the real value of money is never absolutely stable on a sustainable basis during inflation and deflation. There was no Historical Cost Accounting model and no financial capital maintenance in nominal monetary units per se (another very popular IFRS-authorized accounting fallacy) during inflation; that is to say: there were no Historical Cost accounting fallacies. There was no value based accounting. There was also no Consumer Price Index at that time. Consequently there were no units of constant purchasing power and no price-level accounting.
There was no International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies supplying us with the current definition of inflation accounting. There was thus no Constant Purchasing Power Accounting (CPPA) IFRS-approved inflation accounting model under which all non-monetary items (variable and constant real value non-monetary items) in Historical Cost and Current Cost financial statements were required to be restated by means of the period-end CPI to make these restated HC and CC financial statements more useful during hyperinflation.
There was also no real value maintaining financial capital maintenance in units of constant purchasing power accounting model – Constant ITEM Purchasing Power Accounting (CIPPA) – as an official IFRS-approved alternative basic accounting model to the traditional HCA model during low inflation and deflation. There was no IFRS compliant basic accounting option where under only constant items are continuously measured in units of constant purchasing power during low inflation and deflation. There was no option of continuously measuring only constant items in units of constant purchasing power by applying the monthly change in the CPI during low inflation and deflation in order to implement a constant purchasing power financial capital concept of invested purchasing power by continuously measuring financial capital maintenance in units of constant purchasing power and continuously determining profit/loss in units of constant purchasing power.
There were no financial reports: e.g. no income statements, no balance sheets, no cash flow statements, no statements of changes in shareholders´ equity, etc. There were no monetary items and no constant items. There were only variable real value items not yet expressed in monetary terms.
Copyright (c) Nicolaas J Smith 2005-2011. All rights reserved. No reproduction without permission.
Fin24 16-3-11
Monday, 6 December 2010
Inflation targeting or price-level targeting?
That is becoming the question.
Here is a very good article on the subject:
Fed Avoiding Deflation May Depend on Canadian CPI Experiments
I will explain the effect of our traditional, globally implemented and IFRS authorized Historical Cost Accounting model, or, more specifically, the stable measuring unit assumption, re-inforcing deflation (making it more difficult to reverse back into inflation) in an update on this post.
© 2005-2010 by Nicolaas J Smith. All rights reserved. No reproduction without permission.
Here is a very good article on the subject:
Fed Avoiding Deflation May Depend on Canadian CPI Experiments
I will explain the effect of our traditional, globally implemented and IFRS authorized Historical Cost Accounting model, or, more specifically, the stable measuring unit assumption, re-inforcing deflation (making it more difficult to reverse back into inflation) in an update on this post.
© 2005-2010 by Nicolaas J Smith. All rights reserved. No reproduction without permission.
Wednesday, 1 December 2010
Salaries are not monetary items despite Obama´s temporary decree
Trade debtors and trade creditors are constant real value non-monetary items and not monetary items as incorrectly stated by the US Financial Accounting Standards Board, the International Accounting Standards Board, PricewaterhouseCoopers and most probably all others too.
Under the current Historical Cost paradigm many constant real value non-monetary items, e.g. trade debtors, trade creditors, other non-monetary payables, other non-monetary receivables, equity not maintained with sufficient revaluable fixed assets, fixed salaries and wages (President Obama´s federal workers´ salary freeze), fixed rentals, etc. are incorrectly treated as - unnecessarily made into - monetary items. The real values of these items are currently unnecessarily being eroded by the implementation of the stable measuring unit assumption (traditional HCA) during low and high inflation. Their real values would be increased during deflation. In a hyperinflationary monetary meltdown like in the case of Zimbabwe all these items would be unnecessarily eroded completely – because they are unnecessarily treated as monetary items.
Under financial capital maintenance in units of constant purchasing power (Constant ITEM Purchasing Power Accounting - CIPPA) as authorized in IFRS in the Framework, Par 104 (a) in 1989, these items are correctly treated as constant real value non-monetary items and their real values would not be eroded at the rate of low or high inflation or they would not be completely eroded in a hyperinflationary monetary meltdown like what happened in Zimbabwe. Their real values were not eroded during 30 years of high and hyperinflation in Brazil from 1964 to 1994 because they were treated correctly as constant real value non-monetary items in Brazil and updated daily in terms of a daily index supplied by the government.
© 2005-2010 by Nicolaas J Smith. All rights reserved. No reproduction without permission.
Under the current Historical Cost paradigm many constant real value non-monetary items, e.g. trade debtors, trade creditors, other non-monetary payables, other non-monetary receivables, equity not maintained with sufficient revaluable fixed assets, fixed salaries and wages (President Obama´s federal workers´ salary freeze), fixed rentals, etc. are incorrectly treated as - unnecessarily made into - monetary items. The real values of these items are currently unnecessarily being eroded by the implementation of the stable measuring unit assumption (traditional HCA) during low and high inflation. Their real values would be increased during deflation. In a hyperinflationary monetary meltdown like in the case of Zimbabwe all these items would be unnecessarily eroded completely – because they are unnecessarily treated as monetary items.
Under financial capital maintenance in units of constant purchasing power (Constant ITEM Purchasing Power Accounting - CIPPA) as authorized in IFRS in the Framework, Par 104 (a) in 1989, these items are correctly treated as constant real value non-monetary items and their real values would not be eroded at the rate of low or high inflation or they would not be completely eroded in a hyperinflationary monetary meltdown like what happened in Zimbabwe. Their real values were not eroded during 30 years of high and hyperinflation in Brazil from 1964 to 1994 because they were treated correctly as constant real value non-monetary items in Brazil and updated daily in terms of a daily index supplied by the government.
© 2005-2010 by Nicolaas J Smith. All rights reserved. No reproduction without permission.
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